Tuesday, June 1, 2021

Kyrgyzstan holds rate but reduces 'excess' liquidity

      Kyrgyzstan's central bank, which has already raised its rate twice this year, left its key interest steady but said it was taking "active measures" to reduce the amount of excess liquidity in the banking system to limit inflationary pressures.
    The National Bank of the Kyrgyz Republic (NBKR) kept its discount rate at 6.5 percent after raising it in April and February by a total of 150 basis points.
     The central bank moved into a monetary easing cycle in March 2016 and cut its rate 7 times by a total of 5.75 percentage points before raising its rate by 75 basis points in February 2020, just as the COVID-19 pandemic was beginning to sweep through the world, as rising food prices were pushing up inflation.
      In April, when NBKR raised its rate for the second time this year in response to rising commodity prices, the central bank said it had not excluded making additional changes to its monetary policy stance.
     Today, the bank's board said it had maintained the rate in light of the external environment and internal economic conditions and once again said it did not exclude the possibility of making additional adjustments to its monetary policy.
     NBKR did not provide details of which measures it had taken to reduce the amount of excess liquidity in the banking system and thus curb the monetary component of inflation.
     However, it noted participants in the interbank credit market had become more active in the short end of the market and short-term money market rates tend to approach its key interest rate. 
     Commercial banks were also continuing to build up their resource base and expand lending.
     Headline inflation in Kyrgyzstan has fluctuated sharply this year, rising to 8.6 percent in April from 3.2 percent in January - when food price inflation topped 18 percent - then falling to 5.0 percent in August before rising to 10.6 percent in February.
     In April, however, annual inflation eased to 8.7 percent from 10.2 percent in March but as of May 21, inflation had accelerated back to 10.7 percent, according to NBKR.
     "The rise in prices for food products in global markets and in the EAEU countries (the Eurasian Economic Union) is the main reason for the persistent inflationary risks in the country," NBKR said.
     Although the central bank expects the upward trend in food prices to continue until the end of this year, it said the spread of new coronavirus strains and the slower rate of vaccination of the global population still poses a risk to the recovery of the global and regional economy.
     The economy of the Kyrgyz Republic, which shrank 8.6 percent in 2020, is showing a gradual revival of economic activity, with gross domestic product growth - excluding the Kumtor gold mine - of 1.1 percent in the first four months of the year while remittances, that are supporting consumption, rose by 22.4 percent in the first quarter to US$420 million, the central bank said.
     In March last year Kyrgyzstan's som plunged over 17 percent and then rebounded over the next few months. But from June through the end of 2020 the som weakened to around 84.8 to the U.S. dollar and has traded close to that level through mid-May this year.
     But in recent weeks the som has strengthened and was trading around 83.6 to the dollar, down 0.9 percent since the start of this year.
     NBKR said the situation in the foreign exchange market is relatively stable, adding it conducts interventions in the foreign exchange market to prevent sharp fluctuations.
     The Kyrgyz som was launched 28 years ago last month after the former Soviet republic became a sovereign nation, 


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